The severity of the recession is going to hurt both the top and bottom lines of commercial insurers, meaning a ‘turbulent’ year, according to new research.

Commercial insurance is bucking the conventional wisdom suggesting that its boom-and-bust pricing cycles operate outside the broader economic cycles and that means a bumpy ride for the sector through the remainder of this year and perhaps longer, according to research from Advisen Ltd., a provider of insurance market data to commercial insurance executives.

David Bradford

“While past recessions have influenced insurance pricing, no recession since World War II has influenced both supply and demand so profoundly,” said David Bradford, Advisen’s executive vice president and chief knowledge officer, in a statement. “Hard market conditions eventually will provide insurers and brokers some relief, but we see absolute top line income declining through 2009.”

The 15-page report, “The Impact of the Economic Crisis on the P&C Insurance Industry,” suggests that capital-draining developments like recession-driven fraud losses, in conjunction with stagnant capital markets, will lead to a “hard” market. However, the hard phase of this market cycle will be materially different from prior cycles, researchers found.

The economic crisis will cause exposure units to shrink, businesses to fail, and will force companies to consider budget-cutting measures such as higher retentions and lower limits, Advisen said. This falloff in demand will result in a top-line premium decline across the industry, substantially offsetting gains from higher rates, the company predicts.

“Four years of falling rates is putting stress on both insurers and brokers,” said John Molka III, Advisen’s senior industry analyst and report author. “Under more stable economic conditions, the market would be poised for a rebound. But economic turbulence is adding a new layer of complexity to the pricing cycle. We’ve identified the various forces at work on insurers’ top and bottom lines, and how those forces are likely to influence pricing and capacity in 2009 and 2010.”